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In Case of Default, Business Credit Cards get Personal

Just because you keep your work and home finances separate doesn't mean your credit cards do.

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For many small businesses, a business credit card is an important way to separate work purchases from personal ones for tracking, accounting and tax purposes. While there are many ways card issuers can check the financial health of a business -- from annual business income to commercial credit scores -- issuers typically take a peek into your personal credit when you apply for a business card. Business card issuers "ask for a Social Security number, which gives them the opportunity to check an individual's credit before issuing a card," says Linda Sherry, director of national priorities for Consumer Action.

American Express, Chase, Capital One and Wells Fargo are among the issuers that acknowledge they look at a combination of both business and personal accounts during the application process.

According to Bob Falkenberg, senior vice president at Wells Fargo Small Business Credit Cards, there's good reason for the inquiry. Thin business credentials are bolstered by a strong personal profile, particularly when card issuers know that the individual seeking the card will serve as a backstop if the business goes belly-up. "When we approve [a business card] for a customer, we lend to the business entity, and we inform the customer that we require a personal guarantee," he says. "By having the small business owner personally guarantee the credit, we provide credit to many more businesses that would otherwise not have been able to qualify based on the strength of their business financials alone."

Many other cards have provisions within their terms of agreements that make it clear that when you apply, any credit your business receives is, ultimately, your personal responsibility, regardless of the fate of the business. The agreement for Capital One's Spark Business Card, for example, notes that applicants "agree to be individually, jointly and severally liable for all charges." In other words, if the business can't pay its bills, you'll be on the hook. "We do weigh personal credit more [when] the business has less of a track record," says Capital One spokewoman Alison Cahill-Rouse.

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Chase's Ink card, another popular small business option, requires applicants to check a box at the top of the application that indicates that the applicant understands that he or she "will be liable, both individually and jointly," for paying the balances on the account.

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Such guarantees are reasonable for fledgling small businesses that don't have a long credit history to fall back on. They may also make sense for tiny side businesses that don't represent the entire livelihood of the owner.

But these personal commitments are a double-edged sword, particularly if the business fails, says Sherry. "The card issuer could come after a person's personal assets even if the business declared bankruptcy," she notes. Typically, personal assets are shielded in a business bankruptcy.

Fewer federal protections

There may be another consequence as well: Small business cards backed by an individual's credit may seem more like personal cards than business ones, but business cards are not required to offer the same consumer protections added to consumer cards by the Credit CARD Act of 2009. (Though many many business card issuers voluntarily extend the CARD Act's personal-card protections.)

While it might seem wise to forgo a business card entirely, Adam Fingersh, senior vice president of Experian's Business Information Services says that it can be a savvy long-term move. "Business owners might wonder if it's worth the hassle of getting a commercial card if the issuer uses a consumer history," he says. "But establishing accounts in the business's name, even with a personal guarantee, is the beginning stage of separating your personal and commercial credit. When you [ultimately] have a separate credit profile for your business, you can ensure that financial hardship in one area of your life doesn't affect the other." In addition, most business cards have tools and tracking options that are more robust than those found on personal cards.

At the outset, most small business owners that apply for credit cards will be shuttled to options that require the owner to put his or her personal finances on the line if things go south. Knowing the trade-offs can help owners decide whether the protections of a personal card or the more substantial credit line and additional tools of a business card is the best option for their situation.